Britain's 2012 Budget

Wait till the Sun hears that the EU won't let George Osborne reverse the pasty tax

THE Tory tabloids are still seething about what they are calling the "pasty tax", or George Osborne's decision to end the VAT exemption on sausage rolls, pasties, freshly roasted chickens and the like that are sold hot over shop counters or in supermarkets, for munching elsewhere. The Sun devotes two pages to the question and a leader, and links to a petition got up by the National Association of Master Bakers, demanding that the tax break be re-instated.

They had better hurry. I blush to admit it, but five years covering the European Union left me quite the connoisseur of VAT rules (you lucky people). And VAT is a one-way ratchet of a tax, thanks to its role in funding the EU budget. Put simply, the EU doesn't like VAT exemptions or special low rates. It cannot do much about those that already exist, because tax rules are decided by unanimity among all 27 member countries. But if a national government ever gives up a national VAT exemption, it is gone forever (unless all 26 other member countries can be persuaded to show mercy).

Readers' comments

This sounds a combination of a FAT tax (with VAT) given the category of foods covered, snacky rather than meals. The last step would be tax fresh foods that you cook at home. That way even before you can eat, of your hard earned income, you first pay the government taxes. Wow! Progressive.

Ethnarches,
Look for the noun at the link below: note that although the meaning is explained in the plural form, it's listed under the singular with the 'y' spelling. In contrast, when I grew up in the UK, the knuckle-shaped, meat-and-potato filled pastry was spelt 'pastie' (and I should add that I have only heard the meaning listed hereunder in the US)...

Presumably, this means that if I walk up to the bread counter and buy a loaf of bread and a pasty, both fresh from the oven, they could bear price labels including VAT at 20%.

If I then spend enough time wandering the aisles looking for wherever the store manager has decided to hide the nutmeg and cinnamon this week, I could arrive at the checkout with a cold loaf and a cold pasty, no longer subject to VAT.

Imagine the hilarity at the checkout, with fifteen people behind me in the queue, as I refuse to pay the VAT on my now zero-rated groceries.

No doubt I will also have forgotten to bring some proof of being over 18, and the cashier will refuse to sell me a bottle of beer.

The problems of the EU minimum rate of Vat regime are shared by much of EU law. They are:
1. Democratic de-legitimation over time. If Osborne (or any future Chancellor) wants to reduce or increase VAT he/she should be able to do so because they campaigned and won elections oto make such changes. They should not when in power be able to lock their decision in permanently by transferring the right to change the rate again to a Brussles arena beyond the effective reach of any voters in britain or elsewhere (note: successive French presidents have not been able to reduce VAT on restaurant bills).
2. There is no transnational issue of harm at stake. Brussels will tell you that it would 'distort the market' to allow one country to have a VAT exemption. But in reality nobody has been flying to London from the EU26 to avoid paying tax on their lunchtime pasty just as no-one would fly to Paris in the evening to avoid Vat on a restaurant meal.

Bad Eu law like this exists because of a combination of the Eurocrats desire to ever extend their remit, and the national politicians desire to legislate at EU level on matters of only national significance if he either (a) does not have the numbers at domestic level to get the bad legialation passed, or (b) can lock in his political opposition such that they will not be able to undo his work should they (gott verbot) win the next election. Once on the statute book it is almost impossible to remove. And over time the Eu produces more and more of this stuff and a new generation of national politicians come to win elections that result in them 'being in office but not in power' because they cannot change anything due to the supremacy of some decades old EU laws that should never have been created in the first place.

This entire EU edifice of ossified law should be swept away by taking these powers back from Brussels or leaving the organisation completely if it will not give them up.

I suppose we should be lucky this is confined to hot prepared food, and not also cold foods for takeaway, e.g. a 'made' sandwich from a bakers, supermarket, or corner shop. The difference being that basic ingredients are zero rated, whereas a made sandwich has been prepared by someone else as a 'service'.

An up to 20% tax on food? Seriously? The United States may seem socially backwards in many respects, to be sure, but we have the Old World beat on this one. Many groceries are tax-free, and prepared foods like fast food and sandwiches from sub shops are taxed at the state sales tax (which some states don't even have!), the national average of which was 9.64% at the end of 2010. I live in Florida, in a city with a 1% surtax, pegging my sales tax on purchases at 7%. Not too bad at all, in my view.

The problem is not the decision to raise VAT on hot-take-away-food but the many exceptions there are (e.g. cold-take-away-food, books with over 20% text, children's clothes, ...). VAT should be raised evenly on everything, no exceptions! An economy with low levels of savings and a negative trade balance like the UK has room to increase VAT to e.g. 25% (the income tax threshold could be raised instead).

How much does the poor of Great Britain save by the non-taxation by VAT of pasties and roast chickens?

How much does the well-to-do save from this measure?

How much does it cost the revenue authorities and shopkeepers to distinguish between GST free pasties and other foods that are like parties but taxable? How does this last figure compare to the first? I bet that no one knows the answer to any of these questions.

I am all in favour of the poor not being made to suffer taxation but when it comes to VAT the best way to ensure that this takes place is to compensate, or indeed over-compensate, the poor for the VAT burden through the tax and welfare system: that is give them money. To observe that poor people eat pasties and therefore the way to make VAT palatable is to make pasties free of tax is expensive, ineffective and inefficient.

Here in Australia fresh food is tax free which I find nice as it means that the fresh ingredients I purchase from the market for the Thai, Indian and Moroccan specialities I cook at home are tax free. I don't really need this relief.

I heard that the New Zealand Labour opposition party proposed that food be made VAT-free there (it is currently taxable) as a sop to the poor and lost the last election anyway. I believe that they have since given away the policy. This demonstrates the maturity of the NZ electorate at least when it comes to tax. The UK may want to follow this example.

In this blog, our Bagehot columnist surveys the politics of Britain, British life and Britain's place in the world. The column and blog are named after Walter Bagehot, an English journalist who was the editor of The Economist from 1861 to 1877. The blog is currently on hiatus after a change of Bagehot columnist.